Can Gap Keep Up Its Extreme Sales Strategy?

racked.com | April 22, 2015 – If you’ve hit up a Gap or Banana Republic in the past year, there’s a good chance you didn’t pay full price. Both brands, owned by Gap Inc., have become synonymous with constant sales. There are the signs boasting 40% off everything in the entire store or an extra 30% discount on already-reduced items; there are the emails declaring “Last day for 35% off!” and “Hours left for $45 off $100 (this is big).”

Sure, as far as discounts go, that is big, but consumers have come to know better. Blanket sales at both Gap and Banana are so frequent that many shoppers now refuse to pay what the original price tags mandate.

“It’s pointless because you know if you wait a couple days, you’ll get 30% off at minimum, probably closer to 50%,” says Emily Elliott, a style blogger in New York City. “You’re not risking anything. It doesn’t make sense to ever buy anything full price.”

She’s not the only one keeping an eye on the discounts. Publicist Emily Hawkins occasionally pays regular price when she shops at Banana Republic, but only because she knows the store honors sales retroactively.

“I utilize price adjustments at these retailers more than any other,” she explains. “You normally have within two weeks to get a price adjustment, so if there’s something I really want on a day when there’s no additional sale, I’ll purchase it, keep my eye on the sales, and get a price adjustment when the additional 50% off comes back.”

Gap and Banana aren’t the only retailers luring customers with mega deals—similar strategies are employed by Loft and Old Navy, another Gap Inc. brand—but their slashed prices have become a point of contention. Just last year, a customer filed a suit against Banana Republic, accusing the store of “luring” shoppers with “deceptive” sale signs after learning his entire purchase didn’t qualify for the advertised discount.

“This has been going on forever really, for years and years,” retail analyst Owen Shapiro, president of consulting firm Shapiro + Raj, says of brands utilizing extreme sales practices. “Jos. A. Bank is a good example. They have sales that are so large, discounts so dramatic, that it almost forces consumers to shop during these sales. Three suits for the price of one, that sort of thing—it drives volume disproportionately through those times.”

That volume is exactly how Gap Inc. and other companies benefit from too-good-to-be-true sales.

“You’re trading margin for sales and hopefully you make enough volume,” continues Shapiro. “Your percent margin will go down, but total margin will be the same or better.”

In other words, Gap hopes you buy enough discounted T-shirts to make price slashing worth it, which you just might since discounts act as “positive reinforcement” for shoppers. As psychologist Elizabeth Lombardo explains, “It becomes the norm, you start to expect it. When people see sales, they think they’re getting something for free, like they’ll lose money by not buying.”

Huge discounts in particular encourage shoppers to buy things they don’t need, adds Lombardo, which anyone with a closet full of items with the tags still on them can attest to.

The real problems arise when customers become so hooked on these deals, scaling back on persistent promotions becomes nearly impossible for brands. JCPenney famously failed when it tried to ditch its constant sales in favor of a cleaner, everyday low price model in 2012; sales plummeted and customers retreated.

“That was catastrophic for the company,” says Shapiro. “It’s difficult to stop once you get going.”

Liz Dunn, founder and CEO of consulting firm Talmage Advisors, echoes the sentiment: “Sale signs drive traffic into stores. It’s really hard to take the volume hit that would probably happen to correct the markdown problem. It’s like a drug that’s hard to get off once you’ve been relying so heavily on it.”

That doesn’t mean some stores aren’t trying. Express and New York & Company, brands also known for frequent discounts, both recently said they’re reevaluating their promotion strategies.

Gap Inc. has also hinted at a similar change. CEO Art Peck, who officially took over in February, slyly guided a Fast Company reporter away from the sale section during a recent interview, and in Gap Inc.’s latest quarter earnings call, executive vice president and chief financial officer Sabrina Simmons briefly addressed the sales, saying, “We’ll be managing our promotional cadence to try and also support healthier margins in 2015.”

“The companies tend to move together,” says Dunn. “It’s certainly something Gap would like to do, but there’s a tremendous amount of upheaval going on right now at the company as a result of management changes. I think they’re trying to improve the product and once they do that, they might have an easier time with more rational pricing.”

That upheaval includes ousting Rebekka Bay as Gap’s creative director and bringing on a new head of design for the brand, as well as hiring Marissa Webb as creative director for Banana Republic. New global presidents were named at both Gap and Banana, and the company is shuttering Piperlime, its smallest brand, at the end of the month.

“The overhauls are not that uncommon,” says Shapiro. “All retailers go through these cycles. They hit a groove and are really hot and then they plateau or collapse. That’s been the pattern forever. Gap was fantastically successful and then they become a stereotype, too preppy, but at one point they defined casual. They helped America move into what is a more casual way of dressing.”

While Gap Inc.’s sales are actually rising on the whole, it’s in no part due to its flailing namesake brand. Peck has made it clear that his number one priority in his new role is to bring life back to the company, and in particular, to make sure its women’s apparel is on-brand and consistent. For Gap, that means “casual, optimistic, and American,” he noted in the February quarter earnings call.

Gap Inc. wouldn’t comment on its promotional strategy to Racked, but alluded to a new “chapter” under Peck’s reign.

“Our goal is for customers to leave our stores with incredible, must-have products they love, whether that’s a great fitting pair of jeans or the on-trend top of the season,” says spokesperson Liz Nunan. “The company’s next chapter has just started, and we’re excited about where we’re headed.”

As the company figures out what’s next, it’s unlikely all discounts will go by the wayside; what’s at risk are the huge storewide sales.

“When you see 25% off the entire store, often escalating to 40% or 50% in the holiday period, that’s somewhat unprecedented and has only come about in the last couple of years,” says Dunn.

“Sales were definitely amplified during the recession,” adds Shilpa Rosenberry, senior director of global consumer strategy at Daymon Worldwide. “It was the only way brands could get the consumer to instigate the purchase. I think the recession has set consumers’ expectations and it’s difficult to wean them off discounts. Now, getting a good deal is an expectation. It’s no longer just a hope. It goes even beyond the rational aspect of saving money. It’s more emotional, knowing you got a great deal. Searching for sales has almost become a competitive sport.”

The blanket promotion strategy isn’t consistent within the Gap Inc. portfolio, however. While Gap, Banana Republic, Old Navy, and Piperlime (while it lasts) are known for their big sales, Intermix and Athleta are not. Dunn offers a theory: “The level of sale activity is usually inversely related to the strength of the brand. Athleta and Intermix are hot, thus they do not need to go on sale to generate consumer interest.”

Perhaps when Gap is hot again, the extreme sales will stop. For now, though, they at least have some customers, like Hawkins, hooked. She recently cleaned up at Gap, thanks to the additional 60% off she scored on sale purchases.

“I walked out with maybe 11, 12, 13 items, and they were all final sale,” she says. “I just guessed sizes instead of trying them on! I ended up having to give them away to friends because some of them didn’t fit. They don’t take back final sale.”